Over the years, the Bureau of Internal Revenue (BIR) has released numerous issuances for the guidance of taxpayers, tax consultants, and tax examiners alike. Typically, these issuances are well received as they provide clarity on tax issues or help ease tax compliance obligations. Admittedly though, because tax can generally be complicated, we may sometimes find ourselves left with more questions than answers.
For example, let’s revisit a particular revenue memorandum order (RMO), which took effect more than three years ago, RMO 8-2017. It is, for the most part, a much-awaited and welcome development for those who wish to avail of tax treaty benefits, but in some aspects, is still lacking.
Ten years ago, RMO 72-2010 was issued, prescribing the mandatory filing of a tax treaty relief application (TTRA). It was the prevailing administrative authority on tax treaty benefits. According to RMO 72-2010, tax residents of foreign jurisdictions seeking to invoke tax treaty benefits needed to file a TTRA with the BIR before the first taxable event. The TTRA was obligatory, to head off the possibility that they would be taxed using the higher domestic tax rates for their Philippine-sourced income.
However, in 2013, the Supreme Court in the Deutsche case ruled against the administrative requirement imposed by RMO 72-2010, saying that treaty benefits may be applied outright, premised on meeting the conditions provided by the applicable tax treaty.
Four years after the 2013 high court’s ruling, and seven years since RMO 72-2010, we saw a positive development on the administrative and compliance front with the issuance of RMO 8-2017. It simplified the procedures for tax treaty relief through the use of CORTT forms (Certificate of Residence for Tax Treaty Relief) instead of the earlier requirement for TTRAs. However, RMO 8-2017 only covers Philippines-sourced dividends, royalties, and interest income of non-residents. For all other income, the earlier RMO 72-2010 still applied.
Three years after RMO 8-2017 took effect, some questions linger. The general question is, why limit the RMO to dividends, royalties, and interests? Why must the earlier RMO 72-2010 requiring TTRAs still be applied to capital gains tax, business profits, and branch profit remittances? All of these are covered by Section 57 of the Tax Code, similar to dividends, royalties and interest.
Admittedly, there is a practical need for a TTRA when claiming treaty exemption from capital gains tax on the sale of shares not listed and traded through the stock exchange. While not technically to enjoy the exemption, a confirmatory exemption ruling is required by the BIR before a tax clearance can be issued to allow the registration of the shares under the name of the new owner.
When it comes to business profits arising from the sale of goods and services of non-residents, which are not covered by RMO 8-2017 (notwithstanding the Deutsche pronouncement), perhaps a TTRA is still necessary to allow our tax authorities to evaluate the transaction from a permanent establishment perspective. Ultimately, it will determine whether business profits are exempt from the final withholding income tax. Although this end may be achieved during a tax audit, not all withholding agents are regularly subjected to such, thereby limiting the BIR’s visibility on business profit offshore remittances.
What strikes me as quite baffling and a bit more challenging to appreciate, however, is the exclusion of branch profit remittances from RMO 8-2017.
Dividends are income distributions, while branch profit remittances, as derived from the literal term, are remittances of profit. Both are subject to 15% final withholding tax under domestic tax law (with dividends being subject to conditions under the tax-sparing rule), and both are covered by Section 57 (Withholding of Final Tax on Certain Incomes) of the Tax Code. Branch profit remittances are the total profits of a branch applied or earmarked for remittance (without deducting its tax component and with some exclusions) to the branch’s foreign head office. Dividends, on the other hand, are the distributions of a corporation’s earnings or profits to its parent company or shareholders.
To simplify, branch profit remittances and dividends are distributions of profit. The main difference lies in the legal structure of the one making the distribution, which is a branch in the case of branch profits and a subsidiary corporation, in the case of dividends. Still, a branch of a foreign corporation is considered and treated the same way as a foreign corporation’s Philippine subsidiary for income tax purposes, as both are subject to the same corporate income tax.
When it comes to their profit distributions to shareholders, our tax courts have explained the rationale for the branch profit remittance tax. It seeks to put foreign corporations with Philippine branch offices, and those organizing subsidiary Philippine corporations, on equal footing in terms of their income tax burden. If we also look at the Philippines’ extensive treaty network, most of the tax treaties’ articles on dividends cover branch profit remittances, indicating a recognition that they are of the same nature. If such is the intent, it will make sense if they are also on equal footing in terms of administrative requirements for availing of tax treaty relief benefits. However, the clear pronouncements of RMO 8-2017 do not allow this.
At present, RMO 72-2010 on TTRAs issued 10 years ago remains applicable for those seeking tax relief for capital gains, business profits, and branch profit remittances. On the brighter side, we have jurisprudence to rely on if we prefer to do away with the requirements of RMO 72-2010 (except for capital gains for reasons earlier mentioned). But from a practical standpoint, we cannot deny that compliance with the BIR’s administrative issuances (erring on the side of caution) has advantages. The most apparent and common advantage? It will be easier to resolve issues during a tax audit with an approved, or at least duly filed, TTRA on hand.
Still, there seems to be no theoretical justification for RMO 8-2017 to exclude branch profit remittances from the simplified application of CORTT forms. As efficient tax administration and compliance are always part of the national agenda, an expansion of the RMO’s coverage will be another welcome progress. In the last decade, we see developments every three or four years in the administration of tax treaties. Timing-wise, perhaps our tax policymakers are now again primed to shape our rules towards a new efficiency paradigm.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Chiara Gutierrez is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
+63 (2) 8845-2728